Solving Greenwashing: A complex problem with a simple solution

Whether contested or accepted, these accusations of greenwashing must be taken very seriously as they undermine investor confidence and risk rendering the crucial efforts of the financial industry's sustainable transition futile. It is essential that we change the current investment landscape, and this goal cannot be achieved if investors turn away from the green funds available to them. Regulators have recognized the issue and have made attempts, albeit with limited success thus far, to restore order and confidence in sustainable finance.

Nevertheless, it is primarily the responsibility of the financial sector itself to address this problem, considering the significant stake it has in preserving trust. Such a solution necessitates a comprehensive understanding of the multifaceted and complex nature of greenwashing in order to apply appropriate remedies to the various issues at hand.

There are three primary categories of greenwashing:

1. Greenwashing by Intention

This category is the most reprehensible of the three, although it may not be the most prevalent. It involves employing marketing tactics to portray something as environmentally friendly when it is actually not, or only minimally so. This can include showcasing a few commendable initiatives while disregarding the larger context, such as adding wind turbines to a site while the majority of their services remain conventional and heavily tied to the fossil fuel industry. Greenwashing of this nature is not exclusive to the financial sector; it can be found across all industries and may even border on false advertising. Such greenwashing practices are highly unacceptable, and regulatory measures aim to primarily eliminate them. Hopefully, the fines imposed on institutions caught red-handed will serve as examples and deter these abuses from continuing.

3. Greenwashing through Misconception

This category represents the most prevalent and yet least comprehended form of greenwashing. It arises from a significant "disconnect" that has emerged between the financial community and end customers (individual investors or pension fund beneficiaries) over the past decade, coinciding with the rise of ESG. Banks have frequently presented ESG ratings to their clients as a measure of sustainability. In essence, the notion has been conveyed that a company with a high ESG score equates to a sustainable company, and consequently, an ESG fund equates to a sustainable fund. Unfortunately, this perception is flawed.

ESG approaches were never designed to assess a company's environmental impact. On the contrary, their primary objective is to evaluate the potential impacts that the environment could have on the company. These approaches serve as risk management tools developed by investment specialists for investment specialists. Therefore, the ESG approach aims to determine whether investing in a company like Coca-Cola, for example, is advantageous for the investor, rather than assessing its impact on the planet, which is the realm of impact measurement.

This is why Coca-Cola receives an AAA rating in MSCI's ESG rating system, the leading global provider of ESG data. MSCI's analysis indicates that Coca-Cola does not pose a risk to the investor in terms of governance, environmental, and social factors. However, this does not imply that Coca-Cola, one of the world's largest contributors to plastic pollution and obesity, can be deemed an AAA-rated company when it comes to promoting environmental or social improvements.

This confusion has been perpetuated by the banking sector over the past fifteen years, often due to bankers' lack of understanding rather than a deliberate attempt to mislead their clients. Many professionals in the industry still believe that ESG equates to sustainability and continue to endorse ESG funds as sustainable solutions. However, end clients, who find companies like Coca-Cola or Shell listed as "ESG leaders" in their portfolios, understandably struggle to comprehend how these companies contribute to a greener and more equitable planet. It is now crucial to instill rigor within the industry and develop impact products alongside ESG products, as these are the types of products that clients are currently seeking.